Over the past few years the banks have come under almost constant criticism for apparently holding back lending to small businesses and that when they do offer a loan, the terms are so onerous that the business owner decides against proceeding.
So, whilst many businesses of all sizes do want to borrow to expand, they are often hamstrung by the banks. For some companies though, there is a possible alternative; a SSAS (Small Self-Administered Scheme) loan.
SSAS loans can be complicated and are certainly not for every business owner, so we thought we’d take a look at how they work, the advantages and disadvantages and whether a SSAS loan would be a viable alternative to bank finance.
First things first, how does a SSAS loan work?
In many respects it is similar to borrowing from your bank, security must be given, interest is charged and the loan must be repaid, however there are some crucial differences, most notably of course that you are borrowing from your pension.
Under most circumstances a loan from a pension to a member is against HMRC rules, however one exception to this is where an occupational pension scheme, for example a SSAS, makes a loan to the sponsoring employer.
To be set up correctly a SSAS loan must meet five criteria
Security. A SSAS loan must be secured with a first legal charge on an asset worth an amount equal to the money borrowed plus interest.
Interestingly, the asset does not have to be owned by the sponsoring employer i.e. your business; it could therefore be an asset you own personally, such as property or indeed an asset owned by a different person or company. Any asset used as security must be independently valued before it can be accepted by the SSAS.
On the subject of security, Oliver Bowler, Business Development Consultant with Nottingham based SSAS provider, Talbot & Muir said: “The principle of a SSAS loan back is still appealing to small companies and accountants, but putting one in place is harder than ever. The big factor is the security. The loan must be secured as a first charge, preferably against an asset that the SSAS could potentially own such as land or commercial property.”
In theory it is also possible to use residential property as security for a SSAS loan, however this could give rise to an expensive unauthorised payment charge if the company defaults on the loan repayments.
SSAS providers are split on this issue, with some allowing residential property as security, whilst others take a different view, Oliver Bowler, again: “Beware SSAS administrators that allow residential property as security, if the loan defaults this is a taxable asset for the scheme not to mention the fact that the current owners will need to be evicted as a sale is forced!”
Interest rate. The minimum interest rate which can be charged by the SSAS is 1% above the average interest rate of six nominated high street banks; in practice that means the current minimum interest rate payable is 1.5%.
Whilst an interest rate of 1.5% initially looks attractive to your business and will certainly be lower than a bank would charge, it needs to be balanced by the needs of your pension fund and your future retirement planning. A return of 1.5% per year is not an attractive investment for most pensions and members should consider paying a higher rate of interest back to the pension.
Term. A SSAS loan can have a maximum term of five years.
Amount. A SSAS can lend up to 50% of the scheme’s assets.
Repayment. Loan repayments must be made in equal instalments of capital and interest for each complete year of the loan. If a loan payment is missed, then an unauthorised payment is deemed to have been made, which would give rise to a significant tax charge.
But I don’t have a SSAS, what do I do?
If you think a SSAS is appropriate for your needs one can be established with a new contribution or by transferring other pensions.
A word of warning though, whilst new contributions are relatively uncontroversial, there can be significant disadvantages in transferring existing pensions. Before any transfer takes place we would encourage you to seek independent advice to make sure that the transfer is indeed in your best interests and that by making the transfer you are not giving up valuable benefits.
The advantages of a SSAS loan
- Less financial underwriting is needed than for an application to a bank for a loan
- The asset is sufficient security for the SSAS, no other security, for example a personal guarantee or debenture over your company will be required
- The process of arranging a SSAS loan can often be quicker than applying and getting accepted for a bank loan
- The interest rate charged by the SSAS will be less than that levied by a bank, although the needs of the pension fund and your future retirement goals also need to be considered when setting the rate
- No arrangement fee is payable, as it would be with a bank. However, SSAS fees will payable, which could be more or less than your current pension provider charges.
The disadvantages of a SSAS loan
- Whilst the legal and valuations fees incurred in arranging a SSAS loan will be similar to those for a bank loan the SSAS will also incur fees, which may be more or less than the fees you are currently paying on existing pensions
- If your company defaults an unauthorised payment charge may become due, and the pension scheme may incur a loss, especially if the asset used as security is sold for less than the amount outstanding on the loan
- By taking a loan from your SSAS you are closely linking the fortunes of your business and your retirement. If the business fails and therefore cannot meet loan repayments, it may negatively affect your future retirement income, unless of course the sale of the security is sufficient to make good any shortfall
- The term is limited to five years, whereas a bank may consider a long term.
- A bank may be able to accept a wide range of assets as security than a SSAS can
So, is a SSAS loan a viable alternative to a bank?
Clearly every set of circumstances are different, but if you can offer acceptable security, have money in your pension fund or in your business which you could contribute to a pension, then a SSAS loan could work for you.
You also need to be prepared to link your future retirement income, at least in part, to the success of your business, which many business owners would probably argue is the case anyway.
The fact that there is significantly less financial underwriting, you will not need to give a personal guarantee or have the bank take a debenture over your business, makes the SSAS option attractive.
There are however serious downsides, especially in the event of a default, which need to be considered before any decision is made.
Our team of self-invested pension specialists are experienced in this area, if you would like to discuss how a SSAS loan works, or if it is the right option for you and your business call one of our team today on 0115 933 8433, alternatively enquire online or email email@example.com